The Employee Ownership (EO) team at Stephens Scown attended the annual EO conference and one of the key messages was how the EO model is fast becoming a commercially viable mainstream succession option for many businesses.
Employee ownership is where employees buy the business from the owners with payment over a period of time. Usually, the business pays for this exit and the employees don’t pay anything. To get the beneficial tax treatment, the Seller(s) need to sell a majority, so 51% or more of their shares. If this is the case the Seller(s) don’t have to pay Capital Gains Tax – a big saving.
The shares are normally sold to an Employee Ownership trust (EOT) and the EOT holds the shares for the benefit of the employees. If employees leave, they lose their right to return on capital or profit share. A key motivation is keeping employees involved and within the business. Perhaps an exit route for you to consider.
In a recent survey, Hft (formerly the Home Farm Trust) and Care England found that nearly a third of care providers are considering exiting the market for the third year running. Some of the challenges were further intensified by the Autumn 2024 budget announcement. The Nuffield Trust now predicts that the cost to the adult social care sector of the Employer National Insurance hike and the National Minimum Wage increase is an estimated £2.8 billion. This is further exacerbated by an ageing population requiring care whilst the supply and retention of workers has not kept up with demand.
One of the benefits of EO is that sustainability and employees are a key consideration for business founders when making the decision to transition to EO. Yes, there are tax advantages for the founders, however EO draws strength from the founders’ desire to protect the business as a whole, the long-term values they have created and to maintain the culture they have nurtured for the benefit of future generations. In recent years, the EO sector has grown substantially. By the end of 2024, there were over 2,200 EO businesses. Compare this to 2020 where there were fewer than 500 in the UK.
Professor Martin Green OBE, the chief executive of Care England, says, “People-Powered Care shines a spotlight on the immense potential of EO, highlighting how it empowers staff, enhances retention, and fosters a culture of accountability and innovation.” Shaw Healthcare is one of the largest EO businesses in the UK, not simply in the care sector. Data provided by them shows that since becoming EO in 2020, they have seen a massive improvement in retained existing talent. 36% of their workforce has been with them for longer than five years whilst 11% have been with them for longer than 15 years. Happy employees and a stable workforce would almost certainly translate to happier residents who receive better quality care.
One of the main impacts for employees when a business becomes employee owned is the underlying principle of their voice being heard and their engagement with the business, but there are also potential financial benefits. If a business becomes majority employee owned, that is the employee ownership trust owns 51% or more of the business, the employees can be awarded a £3,600 bonus which is free from income tax (not National Insurance Contributions). This is known as profit sharing and is one of the many benefits for employees if a business is majority employee owned.
The report recommends local authorities try and leverage EO as a succession option to retain capacity and build long-term resilience in the care sector in their respective areas. By doing so it can also “build productivity and resilience in the local economy”. Recommendations for the government include a plea to the British Business Bank and other relevant institutions and vehicles to leverage finance and enable employee buyouts in key strategic sectors.
EO can be the saviour of a sector that has people as its cornerstone – people who provide the care and people who need it. One can say that people-centred succession planning is an obvious choice, but more is needed to get this information to the care providers and this report is one step further in doing so.
If you would like to find out about whether Employee Ownership is for you, please contact George Demirev on 07512 332519 or G.Demirev@stephens-scown.co.uk